Message from Wall Street clear, as markets shudder and fall

By Todd Wallack
Globe Staff / July 30, 2011

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The stock market finished the week down sharply, some investors pulled out of money market funds, and financial institutions continued to make contingency plans yesterday as the federal government edged closer to defaulting on its debt for the first time in history.

Though most analysts still believe Congress and the White House will strike a last-minute deal to raise the debt ceiling and avoid a default, stocks slid for the sixth straight day. The Dow Jones industrial average dropped 97 points yesterday, down 4 percent for the week - its worst weekly showing in more than a year.

As the tension mounts, more calls are pouring in from anxious investors to brokers asking whether they should sell their stocks or other investments.

“I think there’s a good amount of stress,’’ said John Cogswell, senior portfolio manager of the Baystate Wealth Management in Boston. “We have some investors who really want to head for the sidelines, and that means moving a large portion of their money into cash.’’

It is possible the market could fall even more dramatically next week if Congress and the White House remain at an impasse on Aug. 2 - the day officials say the US will start running short on money to pay its bills - or credit rating agencies downgrade the government’s pristine AAA standing.

Some nervous investors already are fleeing money-market mutual funds, popular vehicles for stashing short-term savings, because of worries that a default could temporarily erode their value or block access to money. Many such funds hold short-term US treasuries and other government bonds.

The Investment Company Institute, an association of investment companies based in Washington, reported that investors withdrew more than $37 billion from money market funds the week ended Wednesday, the largest outflow this year.

But management companies say they have already taken steps to assure investors that their funds are safe. Boston-based Fidelity Investments, the largest manager of money market funds in the United States, said it has stress-tested its funds, set aside more cash for them, and did not buy any treasuries scheduled to mature during the first two weeks of August.

Pioneer Investments, a Boston mutual fund company, purged all US Treasury bonds from its money market fund earlier this week. But like many money managers, Pioneer said it has not changed its investment strategy for long-term bond and stock funds.

“I think most investors do not believe it’s a very high probability that the government will default,’’ said Ken Taubes, chief investment officer for Pioneer’s US operations.

Taubes said he believes most investors remain convinced a default will be avoided, and that they Aug. 2 deadline is suspect. He noted that government revenues have come in ahead of projections in recent weeks, meaning the government will probably have enough cash to meet its obligations for a few more days - if not weeks - beyond Tuesday. And Taubes and other observers speculate that federal officials could employ creative tactics to free up additional cash, such as by tapping assets in government pension funds.

Many businesspeople, however, are irritated by political leaders’ inability to solve the issue by now. They say the stalemate has created uncertainty for everyone from defense contractors counting on government payments to real estate professionals whose business depends on the government guaranteeing new mortgages.

Downbeat economic data released yesterday only darkened their moods. The Commerce Department reported that the economy grew at a tepid 1.3 percent annual pace in the second quarter, and revised the first quarter rate to 0.4 percent, much lower than initial estimates.

“I’m personally very upset,’’ said Paul Gershkowitz, president of Greenpark Mortgage Corp., a mortgage broker in Needham.

Gershkowitz believes lawmakers could quickly reach a deal if Republicans were willing to agree to modest tax increases for millionaires and Democrats made reasonable adjustments to entitlements, such as postponing the age that younger workers qualify for Social Security. “There has to be give and take,’’ he said.

But Gershkowitz said he has not seen any indication that the partisan bickering has affected mortgage interest rates or caused housing sales to slow more.

Meanwhile, Bank of America Corp., TD Bank, Sovereign Bank and other major banks say they are readying contingency plans in case the government defaults on its payments or temporarily suspends sending checks to federal workers and others, including Social Security recipients.

Several banks, including Rockland Trust and Belmont Savings Bank, have pledged to waive overdraft fees for customers if the US government temporarily suspends some payments. The Massachusetts Bankers Association recommended yesterday that banks consider making sure they have increased access to cash and designate employees to field calls about debt-default implications.

State Street Corp., based in Boston, said yesterday that it “has taken steps to prepare for contingencies, including a lack of liquidity and heightened volatility.’’

“We are in close touch with our clients, industry participants, and regulators, and very much hope a resolution to this matter is reached,’’’ said Marie McGehee, a State Street spokeswoman.

Todd Wallack can be reached at